Global Themes

  • Sterling hinges on earnings
  • Could Italian coalition rock the Euro?
  • Retail sales data main focus

GBP

Sterling hinges on earnings 

The British Pound gained slightly yesterday against both the Euro and US Dollar, GBP/EUR rose by 0.3% edging closer to the €1.14 level. Average earnings and unemployment data will be released today at 9:30am. Unemployment is expected to be flat at 4.2%, the lowest level since 1975. Earnings data, which is measured on a y/y basis for a rolling 3-month period, including bonuses is expected to drop from 2.8% to 2.6%, while earnings excluding bonus is expected to grow from 2.8% to 2.9%.

The emphasis could be on the excluding bonus release, as this represents that base salaries could be increasing in the UK. A positive release for the UK could see GBP/USD take a run at $1.36.

  • The European Union (EU) on Monday warned Britain time was running out to seal a Brexit deal this autumn and ensure the UK does not crash out of the bloc next March. The EU’s Brexit negotiator Michel Barnier told 27 ministers of the EU at a meeting in Brussels that “no significant progress” had been made in negotiations since March (source: Reuters). This could put pressure on Prime Minister Theresa May and Sterling.


EURO

Could Italian coalition rock the Euro? 

Could the new Italian coalition push the Euro lower? Leaders from the League Party and the anti-establishment Five Star Movement held separate meetings with the Italian President yesterday, which yielded positive results in moving towards forming a government. Though not finalized, the prospect of this new alliance has some investors worried, with the Italian 10-year bond rallying to its highest point this month. However, once an agreement has been met, the fear could seep into currency markets with the Euro suffering. The prospect of these parties in power hasn’t shaken the Euro yet as many had predicted it would, mainly because the anti-EU rhetoric from them has been toned down since the election. There is less risk seen now for Italy to exit the single currency, but any hints of dramatic moves like this once they are in power would have a big potential impact.

Looking more immediately short-term, German flash GDP fell for both y/y and m/m this morning. The release puts the Euro on the back foot slightly, with GBP/EUR trading at €1.1360 and with EUR/USD hovering above the $1.19 handle. If this morning’s German releases are anything to go by, today could be another day which sees the Euro’s losses worsen.

  • German ZEW economic and current sentiment is to be released at 9:30am. The ZEW current conditions number for May is expected to fall to 86.2 from 87.9. The headline number for Eurozone flash GDP for Q1 is expected to remain unchanged at 0.4% q/q and 2.5% y/y.


USD

Retail sales data main focus 

April retail sales data for the US is released at 1:30pm today. The retail sales control group figure, which is used for the GDP measurement, is expected to be unchanged at 0.4%. The overall retail sales number for April is expected to be at 0.3% m/m, down from 0.6%, but the figure ex auto’s is expected to have risen to 0.5% from 0.2% for the same period. A number above or below the overall retail figure could potentially see the US Dollar break out of the current ranges against the Euro and Sterling respectively.

A print below 0.3% could see cable make a move towards $1.36 and EUR/USD back to $1.20 – the recent dollar rally may be running out of steam and a retail sales figure below what is expected could be the catalyst for that (source: Bloomberg). Conversely, a strong number coupled with poor results in data for the UK and Eurozone mentioned above would see the dollar continue at the current levels and potentially move back into the $1.18 handle against the EUR.

  • The first of this week’s speakers from the Federal Reserve, James Bullard and Loretta Mester, both laid out in their speeches yesterday the need for rate rises to continue at the current gradual pace (source: Reuters).


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